1. AEB 4283: International Development Policy
Section III: International Problems and Policies
Week 10: Trade and Globalization
Today:
Discuss make-up exams
Discuss Class Project paper
Discuss case study on Taiwan in class from Chapter 12
Start Chapter 13, “Balance of Payments and Debts”
Next Week:
Complete Chapter 13 and Start Chapter 14
Start topic: “Foreign Finance, Investment and Aid”
Assignment for Monday: Read Chapter 13

2. REVIEW: Trade and Globalization
Globalization → increase in the openness of economies to international trade and financial flows (FDI, Portfolio Investment; Foreign Aid)
Trade is a key element of the globalization trend
Two key trade theories:
The principle of Comparative Advantage → countries should focus on producing the products that they are the best at producing
Factor Endowment Trade Theory → proposes that countries should specialize in the production of goods which use their most abundant factor (factor endowment) most intensively
The concepts of Comparative Advantage and Factor Endowment Trade Theory form the basis of Neoclassical Trade Theory
Unrealistic assumptions limit the applicability of the Neoclassical Trade Theory for the realities the LDCs face today

3. The Traditional Theory of International Trade
Main conclusion of the neoclassical model is that all countries gain from trade
World output increases with trade
Trade will stimulate economic growth
Unrealistic assumptions from Neoclassical Trade Theory that are not very realistic for LDCs
freely available technology
perfectly competitive markets
no government interference in trade
There are many factors that determine whether trade is good or bad for a country and in reality some aspects of all approaches, Export Promotion, Import Substitution Industrialization (ISI), Economic Integration may be necessary for LDCs
Some government help maybe required ( tariffs and theory of protection)

4. The Critique of Traditional Free-Trade Theory in the Context of Developing-Country Experience
Some Conclusions on Trade Theory and Economic Development Strategy
Trade can lead to rapid economic growth under some circumstances
Trade seems to reinforce existing income inequalities
Trade can benefit developing countries if they can extract trade concessions from developed countries
Developing countries generally must trade
Regional cooperation may help developing countries

5. What the U.S can do to help global trade?
Oct. 22, 2002
What the U.S can do to help global trade?
“The World’s poorest developing nations have a special place in the Obama trade agenda.” US Trade Representative Ron Kirk, Georgetown University, 29 April 2009
The economic crisis is hitting the world’s poorest countries through falling trade and commodity prices.
Many of the trade policy steps that countries should take, or avoid, in coping with the crisis
Avoiding additional protectionist measures is at the top of the list!
The eighth of the MDGs adopted at a UN summit in 2000 calls on the rich countries to provide duty-free-quota-free market access for the LDCs.
Providing full market access will not reverse the decline in trade flows, but it would open opportunities for some of the poorest countries in the world. 5

6. Case Study: Taiwan

7. Per Capita GDP* in Two Eastern Asian Tigers
Source: Penn World Table
* At purchasing-power-parity in 2005 USD

8. A Development Success Story: Taiwan
Positive experience of the four Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan – also more recently, Brazil, Mexico and China) → Expanding manufactured good exports
One of the four “East Asian Tiger” economies.
A “development” miracle.
Average annual economic growth rate of 7% during
Universal elementary & middle school education (9 yrs mandate).
Life expectancy: 75 years; infant mortality rate: 5/1000 live births
Absolute poverty virtually eliminated.
Low unemployment.
Low inequality

9. A Development Success Story: Taiwan
Reasons for success:
Emphasis on education (including girls).
Extensive infrastructure development.
Early and thorough land reform.
Very high rates of saving and investment (not overtly dependent on FDI)
Diffusion of commercial ideas from China, Japan & USA (e.g., China External Trade Development Council).
Effective government industrial policies (e.g., successful import substitution policies).
Market incentives / entrepreneurial culture.

10. A Development Success Story: Taiwan
Reasons for success:
Emphasis on education (including girls).
Tax breaks on donations
Incentives between education & business stressed
Extensive infrastructure development.
Early head start due to established networks in place
Government incentive to encourage infrastructure development
Transparent proceedings kept corruption in check
Early and thorough land reform
Rapid ag productivity → land-to-the-tiller government program in the 50s

11. A Development Success Story: Taiwan
Successful capital formation efforts → very high rates of saving and investment (not overtly dependent on Foreign Direct Investment (FDI))
Govt. policies that promote savings → high interest rate on savings, tax-free
Diffusion of commercial ideas from DCs
Investing the savings in productive sectors is key.
Govt. role in agencies like China External Trade Development Council to promote industrialization (adopt technologies), market development
Effective government industrial policies (e.g., successful import substitution policies).
Govt. role to license exports, control FDI, export cartels, fiscal incentives for priority sectors in the infancy stages
Market incentives / entrepreneurial culture
solid property rights, work ethic, export-led growth from the 60s

12. A Development Success Story: Taiwan
Challenges:
Relationship with mainland China.
Affects its exports to the country
Environmental problems.
Chronic air pollution problems
Land use patterns
Land is limiting factor
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